I s Amazon.com's business model really working? With apologies to the National Football League, "upon further review," the online retailer's customer-growth and customer-spending trends may not be as rosy as the company portrays them to be.

In the wake of
Amazon's
fourth-quarter earnings announcement earlier this month, we were quick to applaud the company for finally disclosing numbers aimed at telling investors how much Amazon's customers were spending.

But after taking a closer look at the results released by the company, we're not persuaded that Amazon is actually expanding its "wallet share." A careful dissection of the numbers shows that revenues per customer may still be declining or are flat at best.

Why should we care about something as pedantic as revenues per customer? Because it strikes at the core of what Amazon is selling Wall Street and the investing public. Amazon's multibillion-dollar "build it and they will come" business plan is predicated on constructing the biggest customer base on the World Wide Web and making sure that shoppers buy more stuff as Amazon increases the size of its virtual store.

Amazon's business plan is ambitious, audacious and unprecedented. But for it to work, revenues per customer must grow. Until now, based on the information provided, Amazon's revenues per customer were declining.

Last summer Merrill Lynch analyst Henry Blodget, a vocal Amazon bull, challenged Amazon to reverse the revenues-per-customer trend by the end of this year. Blodget acknowledged that this reversal was integral to prospects for future profitability.

Lo and behold, Amazon delivered this New Age metric in its fourth-quarter earnings reports. The company said its revenues-per-customer figure for the trailing 12 months was $116, compared with $106 for the same period a year prior -- a 9.4% improvement. Indeed, management went out of its way to say this figure was evidence that its business model was working.

"The upward trend in this metric is the result of adding additional products and services to our store and thus gaining a larger share of wallet," noted Amazon President Joe Galli during the company's February 2 conference call.

Is the turnaround real or is it Memorex? A closer look at the data released by Amazon actually raises questions about some of the company's claims and the overall health of its customer base, says hedge-fund manager Eric Von der Porten.

Von der Porten, of Leeward Investments in San Carlos, California, is no stranger to this column, having been among the first to single out the importance of revenues per customer. He is an unabashed skeptic about the company's business model and is betting against its success by owning put options.

That said, Von der Porten wants Amazon to show him the customers' money. If, in fact, Amazon's customers are spending more dough quarter over quarter, the company should provide more data, specifically the number of customers who spend money on the site each quarter. That would help clear up some of the murkiness. Amazon, however, chooses to keep that interesting nugget to itself.

Von der Porten surmises that Amazon is being selective in choosing which data to release because full disclosure of all of the numbers would not necessarily show that wallet share is rising. In making its calculation for itself, Amazon probably redefined the measurement to put the company in a more positive light, he says.

Von der Porten's calculation, on the other hand, shows that the average "active customer" generated about $3.92 of revenue per week in 1999, which is slightly less than $3.96 a week in 1998.

Von der Porten arrives at an opposite conclusion from Amazon's by adjusting for the amount of time active customers were in the database in 1999 compared with 1998. The "average active customer" was in the 1999 database roughly 10% longer than the same average customer during the previous year, Von der Porten attests.

If his conclusion is correct, "Amazon's disclosure could be akin to a company touting quarter-over-quarter revenue growth when, in fact, the growth resulted from a greater number of days or weeks in the most recent quarter," Von der Porten maintains. "It doesn't show the increase in wallet share that the company has been presenting."

Von der Porten backs up his analysis and methodology in a detailed research report that was provided to Barron's and Amazon. Barron's forwarded copies to Amazon's Galli and its chief financial officer, Warren Jenson, but telephone calls seeking a response were not returned.

In choosing to use "active customers" to calculate wallet share, Amazon was forced to concede that about three million of its 17.1 million "total" customers didn't buy anything in 1999. What good is touting customer growth as evidence of success if they don't come back to your store?

In his conference call comments, Galli said that "early [customers] tend to be more rabid in their spending habits." In fact, it looks like early customers are jumping ship. Of Amazon's 5.75 million active customers in 1998, only 3.4 million bought anything in 1999. That means about 40% of Amazon's 1998 customers dropped out of the database last year. "Given the cost of acquiring and maintaining customers, this would appear to be a very negative reading of customer loyalty," Von der Porten asserts.

But you wouldn't know it by listening to the most influential sell-side analysts on Wall Street. Their unfettered enthusiasm for Amazon goes unabated. Because tens of millions of dollars in investment-banking fees are at stake, it seems these trusted souls are simply compelled to offer big back-slapping "attaboys" to Amazon, and some even upgrade their "buy" recommendations. Money-losing Amazon, which boasts a market capitalization of $23.6 billion, saw its shares jump 25%, to 84 3/16 from 67 7/16, on the earnings report. The shares have since drifted back down to 69 1/8 .

The tabloid-friendly headlines bannering analyst research notes help explain that surge. From Goldman Sachs' Anthony Noto: "The Power of an Internet Franchise Emerges!" And from Morgan Stanley Dean Witter's Mary Meeker: "Correction: Inflection! Amazon.calm!" In her note, Meeker wrote: "Sure, Amazon.com's fourth quarter wasn't necessarily pretty financially or operationally and ... it was a pretty damn inefficient quarter ... but ... we think the worst, yes, the worst of this wild ride with Amazon is behind us. It ain't easy to get 17 million happy customers in five years!"

Memo to Mary: Three million-plus of these customers may be happy precisely because they didn't buy anything from Amazon last year.

But then, one would hardly expect searing comments, given that Morgan's bankers were busy netting another blockbuster convertible-bond offering for Amazon. Just two business days after Meeker's laudatory note, Amazon announced that Morgan Stanley would peddle 690 million euros, or $672 million, worth of convertible 10-year notes, to help pay for its ever-expanding expansion plans. The e-tailer's first convertible underwriting raised more than US$1.2 billion.

Barron's provided Meeker with a copy of Von der Porten's analysis, but she was unavailable for comment.

For his part -- and to his credit -- Merrill's Blodget read Von der Porten's report and returned our calls. For starters, Blodget thinks we make too much of a stink about the fact that 3.4 million of the folks that Amazon counts as customers didn't buy anything in 1999. The analyst contends that Amazon has found that people who bought books in 1996 actually came back and bought stuff years later. Thus, he says, there is value in counting these "inactive" shoppers as customers.

But on the far bigger question as to whether Amazon's wallet share is rising, Blodget contends that, according to his tabulations, the company has sufficiently demonstrated that the declining trend in revenues per customer has been halted.

"At least, the trend that has worried me has stabilized. This is the first quarter by that analysis that [revenues per active customer] stopped going down. We are only beginning to see that they could be gaining a greater share of wallet," says Blodget, who raised his intermediate-term rating from "accumulate" to "buy."

Blodget, however, did not go so far as to say that revenues per active customer were rising, which is what Amazon's Galli has said. Nor does he dispute Von der Porten's analysis. "I think his analysis is interesting, but my basic point is that he is splitting hairs," says Blodget, who maintains there is much more to Amazon's business model than just wallet share and that the company should be valued as an Internet portal, like Yahoo or pre-merger America Online.

"If you are buying Amazon [shares] based on that one detail, you're not seeing the forest for the trees," Blodget says. "You are staring at the bark."

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